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When an app replaces 1200 bank branches …

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I was invited to address a commercial bank this week, and they wanted me to make it specific to their strategy. In reading their strategy, I saw something that jumped off the page: new branches. Why, in the digital age, would any bank be opening more branches?

I asked them this question and they said it is because they are a commercial bank, not a retail bank. Businesses want access to buildings and humans. I pushed back and said: isn’t that just because you haven’t given those businesses the automation they require? We went back and forth a bit, and the bottom-line appears to be an entrenched mentality that corporates want banks to be physically present, according to the client; whereas I believe that corporates may want banks to physically present, as in they have a relationship manager who visits their offices, but do they really want a physical branch?

It brings us back to that old thorny question of bank branches, and how long will they exist. My view is that they will exist forever. Shocker! But they will be slimmed and trimmed to the point whereby most are access points to digital services, apart from those in the areas of highest footfall which will be advice and service centres.

Equally, I believe bank branches will exist forever as they are where the trust is. When it comes to money, we think differently. As I said yesterday, money is at the core of everything we do, so it needs physicality to build trust. It’s not about transactions, advice or service, but trust. In talking with digital banks who have physical outlets, they tell me that they get two to three times more assets and deposits where they have physical outlets to where they don’t. For these banks, branches are their marketing investment. It’s all about trust.

We have seen this in the rise of Metro Bank who, thanks to having physical outlets, are profitable after just eight years of operation.

With 55 branches and 1.2m customer accounts, Metro made a net profit last year of £10.8m, which compared with a loss of £16.8m the previous year.

However …

The bank’s return on equity was 1.2 per cent and its costs wiped out 90p of every pound it earned in revenue.

Physicality comes at a high cost.

This is why most developed economies are shrinking their branch networks, and generally by around 80%. Four out of five traditional bank branches are no longer needed … but that is a controversial statement. For example, Lloyds Banking Group made a records profit in the first quarter but also announced continuing branch closures. In response, Mike Cherry, Chairman of the Federation of Small Businesses (FSB), said:

“When a town loses a bank branch it hurts vulnerable consumers, high street footfall and small business revenues. We've seen challenger banks who are expanding their branch networks also report strong results, so we know it's an approach that works from a commercial perspective. If a small firm can't deposit and withdraw cash easily it has to store more on site, making it a target for theft. Equally, many small business owners have working relationships with branch staff that go back years. That's not something that can be replaced by an app.”

Banking is emotional and psychological. Access to a physical store gives us comfort … but is it worth it? When banks are driven by the numbers, can they afford such a luxurious overhead?

According to the European Banking Federation, there were almost 240,000 bank branches across Europe in 2009. Today there are just under 190,000. 50,000 gone in nine years. America has 93,283 branches, also down six percent since 2009.

This definitely has an impact. A 2014 study estimates that when branches close, new small-business lending falls by 13% in the surrounding area. In low-income neighbourhoods, such lending contracts by nearly 40%. That is the issue: it makes a financial desert of the surrounding area. But all is not lost as, since the financial crisis hit, most banks in Europe and America have focused upon wiping out cost overheads by switching customers from physical to digital.

Unfortunately, as I alluded to the other day, that seems to be the focus of many banks’ digital strategies: to switch customers from bank service to self-service. It is a cost reduction focus, rather than a customer focus. It shouldn’t really be the case. The strategy should be to switch customers from poor branch experiences to superb digital experiences, but hey, that’s another matter.

Anyway, I’ve discussed the branch question many times on the blog and my view is that we will move to a less branch future but never a branchless future. Humans need access to humans, and they always will when it comes to our deepest and most emotional areas of our life: relationships and money.

Meantime, I was intrigued to see that Bank of America are opening 500 new branches to add to their existing 4,500. In the announcement, Dean Athanasia, co-head of the firm’s Consumer Banking and Small Business Operations, said: “There’s less a need for a big, giant, grandiose lobby. We want to build it for our clients, not for us.” That’s why the new branches focus upon providing as many meeting spots as possible for clients to talk to staff about mortgages, retirement saving, small-business loans and other products, and not transactions, checks deposits or cash.

The rider on that one however, is the closing paragraphs:

Even with the new branches, Bank of America’s overall retail network could dip below its current count for a time, Athanasia said. That’s because Bank of America is continually weighing whether to close branches, based on factors such as proximity to other locations, nearby competition and lease considerations, he said.

“More often than not, we’ve closed branches where we had a lot of overlap, or they were in some locations where we didn’t have critical scale,” Athanasia said.

Customers using the bank’s technology services have also reduced the need for so many branches, Athanasia said. Apps now handle the deposit-taking volume of 1,200 financial centers, he said.

When an app can replace 1,200 branches, you know you have something surplus to requirement.

Chris Skinner Author Avatar

Chris M Skinner

Chris Skinner is best known as an independent commentator on the financial markets through his blog,, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal's Financial News. To learn more click here...

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